On Friday 1st August, after the markets had closed, the Supreme Court announced it had overturned the Court of Appeal decisions in 2 out of the 3 motor finance commission cases in Hopcraft, Johnson, and Wrench.
In what has been described as a victory for common sense, the Supreme Court ruled that motor dealers do not owe customers a fiduciary duty when arranging finance and so therefore the issues of undisclosed or secret commissions amounting to bribery fell away.
The Supreme Court did uphold the Johnson case which was about unfair relationships under s140A of the Consumer Credit Act 1974 (“CCA”).
The Supreme Court, whilst recognising unfairness depends on the facts of each case, commented that the following factors should be considered:
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The size of the commission relative to the charge for credit. In the case of Johnson, this was circa 55%.
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The nature of the commission, for example, whether it is discretionary.
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The extent and manner of disclosure, although the Supreme Court said that non-disclosure of commission does not in itself mean the arrangement is unfair. However, in Johnson the motor dealer had a first refusal arrangement with the lender, which was not disclosed to Mr Johnson.
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The characteristics of the consumer. Mr Johnson had not read the agreement and was deemed “unsophisticated.”
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Compliance with regulatory rules, such as CONC.
With there being an industry-wide redress scheme this negates the need for customers to use Claims Management Companies (“CMCs”) or law firms. Perhaps rather belatedly, at the end of July, the FCA and the SRA published a joint statement warning CMCs and law firms about poor practices especially concerning their marketing around motor finance commission claims. The FCA has required 225 promotions from CMCs on motor finance to be amended or withdrawn, including some which were highly speculative in suggesting the compensation consumers may get.
There is still a lot of uncertainty, such as how far the redress scheme will go back, the FCA wants to go back to 2007, but is already getting resistance on this from the House of Lords Financial Services Regulation Committee and the Finance & Leasing Association, questioning whether the documentation is still available to determine whether any redress will be due. Barclays are still challenging a FOS decision in the Court of Appeal, which is due to be heard in September. Whereas the FCA in its work had been concentrating on Discretionary Commission Arrangements, the Supreme Court decision, and the shift in focus to unfairness under the CCA, may bring more arrangements into scope.
One area of certainty is that the FCA in its announcement said it welcomed the industry-led practices to enhance the information provided to customers following the Court of Appeal judgment.
“Under the Consumer Duty, we increasingly monitor outcomes consumers are receiving as well as compliance with rules. Our view is that these updated practices are contributing to better consumer outcomes.” Therefore, disclosure of commission in motor finance is here to stay.
Rest assured ITC will continue to monitor developments and will review and respond to the FCA’s consultation paper. Having previously set a commission cap for our Appointed Representatives, we are confident that will go some way in limiting and mitigating potential complaints and redress based upon the Supreme Court’s key factors, which will form the basis of the FCA’s industry-wide scheme.
Whilst it is still looking like redress liabilities will fall to the lenders, motor dealers will be expected to provide information to them. Also, although complaint numbers are now expected to fall, you should still review complaints about motor finance commission and pass them onto ITC or the lender as you do now.
